Technology Transfer and Countercyclical Regulatory Policy

Will technology transfer to China turn out to be a bad deal for some U.S., Japan, and European companies? Today’s article in the WSJ on high-speed rail raises some interesting questions.

QINGDAO, China—When the Japanese and European companies that pioneered high-speed rail agreed to build trains for China, they thought they’d be getting access to a booming new market, billions of dollars worth of contracts and the cachet of creating the most ambitious rapid rail system in history.

What they didn’t count on was having to compete with Chinese firms who adapted their technology and turned it against them just a few years later.

This is a very important story. The economics of technology transfer, in my opinion, is the hidden engine for the global economy. When technology–knowledge capital–is transferred by a U.S., European, or Japanese company to a lower-cost Chinese supplier, what happens? The immediate effect: China becomes more productive and richer by the value of that knowledge capital. This is to China’s credit, incidentally, since absorbing technology transfers is not an easy task. (I plan to do an estimate of the size of the technology transfer pretty soon).

You can think of the technology transfer as implicit payment for cheap imports. U.S, European, and Japanese companies transfer knowledge capital to Chinese suppliers, and get back low-cost goods and services in return.

But to make technology transfer a win-win game for everyone in the long-term, three things have to happen next. First, Chinese firms must improve on the transferred technology, in order to boost productivity globally.

Second, U.S., European, and Japanese firms must switch some of their resources from production to research, development, and design, and create the next generation of innovative products. That’s the Apple strategy, and it’s worked well for them.

Third, U.S., Japanese, and European firms must slow down the rate of technology transfer, especially on cutting-edge technologies and key technologies for the defense industrial base. Successful innovation is risky business, and shouldn’t be given away so easily.

How can government help? That’s where countercyclical regulatory policy comes in. The U.S. is at a crossroads right now. The job market is weak and innovation is lagging. At this crucial moment, we should be doing everything we can to encourage the domestic sectors that are already innovating and growing. That includes communications, biosciences, and higher education.

Encouraging innovation and growth, however, does not translate into “adding more regulations.” In this downturn, Congress and the Obama Administration must show that they actually are willing to put jobs and innovation first over short-term regulatory objectives. That’s the way we can both create jobs in the short-run and find a long-term path for the future.

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